Article by Colin D McKie and Brett Basdeo From Maples and Calder

The Cayman Islands Court of Appeal has allowed the appeal of a creditor against a bankruptcy order made against two Cayman Islands resident debtors, the primary purpose of which was to enable their trustee in bankruptcy to apply for Chapter 15 relief in the United States.1

Mr and Mrs Millard are longstanding Cayman Islands residents whose primary assets consist of shares in wholly owned Cayman Islands-incorporated investment holding companies. Those companies in turn own real property in a number of jurisdictions, including the Cayman Islands and Florida. The Millards’ debts included alleged debts owing to the Government of the North Marianas Islands (the “Marianas”), an overseas territory of the United States, in respect of unpaid taxes accrued while they were resident in that jurisdiction. The Marianas had obtained default judgments against the Millards in the Marianas but had apparently taken no steps to enforce the judgments for 17 years. By January 2014, the Millards owed the Marianas a sum in excess of US$123 million, including accrued interest.

The Millards alleged that they had not become aware of the default judgments until 2011 when the Marianas commenced enforcement proceedings against them in the United States. They commenced proceedings to have the default judgments set aside; however, a Florida court ruled that the issue should instead be determined in the Marianas courts.

Following that, the Millards filed for bankruptcy in the Cayman Islands. They claimed they were entitled to a bankruptcy order because, as a result of the default judgments, their worldwide assets were less than the amount of their total liabilities by a substantial margin. The Grand Court found that sufficient reasons had been established to exercise its discretion and made the bankruptcy orders and appointed a trustee in bankruptcy.

Once the Orders for bankruptcy were made, the trustee in bankruptcy applied for, and obtained, recognition as a foreign representative under Chapter 15 of the United States Bankruptcy Code, and a stay on the Marianas’ enforcement proceedings in New York and Florida. The Marianas appealed.

The Court of Appeal held:

(a)       A debtor on his own voluntary bankruptcy petition must prove that he is insolvent.

(b)       Although the debtor’s worldwide assets would be taken into account for the purpose of establishing the debtor’s insolvency, only liabilities enforceable in the Cayman Islands could be included. Foreign judgments in respect of taxes, such as the judgments obtained by the Marianas, were not enforceable in a bankruptcy.2

(c)       It would be illogical to take account of a debt which would not be provable in the debtor’s bankruptcy estate in the resulting bankruptcy.

(d)       Once the Millards’ debt to the Marianas was taken out of the solvency calculation the Millards were clearly solvent, and so the bankruptcy orders must be discharged.

Although the Court of Appeal overturned the Millards’ bankruptcy orders, it is important to note that the decision turned on the application of the correct test for insolvency and ascertaining the true assets and liabilities that may be properly brought into account for that purpose. The Marianas’ submission that the Millards had acted improperly by seeking their own bankruptcy for the purpose of applying for Chapter 15 relief (to relieve them of their liability to the Marianas) was not adopted by the Court – rather, the Court recognised that there may well be cases where bankruptcy orders could be made for the purpose of bringing US assets under the control of a trustee in bankruptcy.

The decision affirms the longstanding orthodox approach to foreign tax liabilities, which may now be firmly considered to form part of Cayman Islands law. The relationship between Cayman Islands insolvency proceedings and Chapter 15 recognition is expected to remain unchanged.

Footnotes

1 The Government of the Commonwealth of the Northern Mariana Islands v Millard (unreported, 15 April 2014).

2 Applying the established principles set out in Government of India v Taylor [1955] AC 491 (HL).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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